Updates on how the House and Senate tax bills are progressing, and what awaits us in the next few weeks.
Since our last post on the topic, the US Senate passed its own version of tax reform.
This week both chambers sent representatives into a Conference Committee to iron out the differences in the two bills. Surprisingly, that committee met for just a short time before announcing that agreement had been reached on all key issues.
The legislative language is currently being updated and the final bill will voted on in both the Senate and House of Representatives early next week barring new and unexpected hurdles. Senators and Congressmen promised a simpler tax code, but the final legislation may make things even more complex.
We won’t get into too much detail in this post, but we do want to point out major issues that are front and center in these final stages of getting a bill to the President for signature.
The new corporate tax rate will be 21% vs the current rate of 35%, along with a reduction in the rate for some pass-through entities like S corporations, partnerships and LLCs (subject to new restrictions on categorizing income).
To be sure, many of our nation’s largest companies are going to get a massive tax cut, and legislators are counting on that savings being spent on new business investment, more hiring and higher wages. Critics argue that there is no guarantee of how much, if any, of the massive windfall will be spent on such things, and they are correct. Neither plan calls for any restriction on how tax savings must be allocated.
One needn’t be a conspiracy theorist to imagine a CEO deciding to buy back his own company’s stock over boosting wages or hiring more workers. It will happen and it won’t sound or look good when it does. Prepare to be bombarded with such speculation as the media switches to assessing the impact of the final legislation.
The plan offers much less in the way of tax relief for individual taxpayers. In fact, there is a very good chance that some upper middle class and upper class taxpayers will see a tax increase, especially those in high tax states like California.
The bill calls for a potential $10,000 cap on deductions for state income and property taxes, but details remain unclear for the moment. Without the full deduction of these items, taxes on millions of Californians and their counterparts in New York, Connecticut, New Jersey and other high-tax states are likely to go up. On the positive side, the top marginal tax rate will be reduced to 37% from its current 39.6%. However, the number of brackets and break points is still unknown.
It does look like some or all of the individual tax cuts will sunset in the year 2025, while the cut in corporate rates will be permanent.
A recent Quinnipiac poll indicates that only 29% of Americans approve of either tax proposal, and Republicans are taking on a big risk for upset in mid-term elections if they pass a final bill that remains unpopular with such a larger majority of voters.
The final result coming out of the Conference Committee also increases the risk of exceeding budgetary limits that allows the Senate to pass the final legislation with just 50 votes through the parliamentary process known as reconciliation. Some believe that Republicans from both chambers have painted themselves into a political corner by following through on a promise of tax reform that may end up being very unpopular. Corporations don’t vote, but individuals do.
Fortunately, the rules regarding commercial real estate acquisition and operation have been left largely untouched in either plan. So, it’s too soon to say if commercial property values will be impacted. However, the Senate plan shortens the economic life of structures to 25 years from the current 39 years, which would result in additional yearly write-offs to property owners. The House plan was silent on the issue, and we haven’t been able to confirm what is in the final bill.
The next week will get very interesting. Like Yogi Berra was famous for saying; it ain’t over til it’s over. Expect some surprises and expect them not to be good ones. Pardon our cynicism, but legislative sausage-making is a messy business, especially when it comes to changing the tax code.
Hopefully, this gives you a better idea about where the battle lines will be drawn. Let’s hope the final result is good for business, good for individual taxpayers and good for the country. Stay tuned…